References

Forms

Federal Income Tax

As a webmaster who earns money online, the tax that’s most likely to take the biggest chunk out of your earnings is the Federal Income Tax. All profits earned online whether it’s through ads or services rendered, are subject to the federal income tax.

2011 Federal Income Tax Rates

Tax Bracket

Married Filing Jointly

Single

10% Bracket

$0 – $17,000

$0 – $8,500

15% Bracket

$17,001 – $69,000

$8,501 – $34,500

25% Bracket

$69,001 – $139,350

$34,501 – $83,600

28% Bracket

$139,351 – $212,300

$83,601 – $174,400

33% Bracket

$212,301 – $379,150

$174,401 – $379,150

35% Bracket

Over $379,150

Over $379,150

Only the profits portion of your earnings are subject to income taxes. Make sure to properly document all expenses on your income tax return so you don’t pay more than you have to!

Where to Report your Revenues and Expenses (Does not apply for C-Corporations):

Report all of your revenues on Schedule C (Form 1040) on Part 1, Line 1.

Report all of your business expenses on Schedule C (Form 1040) on lines 8-27. (See our business expense section for a list of common webmaster expenses that you can deduct from your taxes)

The “Cost of Goods Sold” section is not relevant for most webmasters. This section is typically used for businesses that sell physical products. If you earn revenues through Ad networks, affiliate programs, or freelancing you don’t need to worry about this section. For those who sell physical products, you can use this section to report the costs of your product, so you only end up paying taxes on your profits.

Will I get a Tax Refund?

After filing your income taxes, the only way that you’ll receive a tax refund is if you paid more than you had to. This isn’t a common occurrence when you file your own taxes, unless you made several serious mistakes. Receiving a tax return is much more common when you work at a standard job where you receive a pay check – because a certain percentage of your pay is automatically withheld from your paycheck as income tax. This withholding is usually more than your total tax liability, which is why tax refunds are fairly common when you work for someone else.

In my opinion if you earn over $15,000 a year online through Adsense, Freelancing, or affiliate networks I strongly recommend you find a tax professional to help you with your taxes, as preparing your own income tax return if you run your own business is a lot more difficult than doing your own taxes when you receive a paycheck from someone else. If your business is organized as a partnership or multi-member LLC, you’ll need to file Form 1065 and issue Schedule K-1s to all of your members on top of your regular 1040 income tax return. If you run your business by yourself or are a single member LLC, than doing your own taxes shouldn’t be a problem.